Freddie Mac 2008 Annual Report Download - page 269

“NOTE 5: INVESTMENTS IN SECURITIES” for further information on these investments. Although we have not
categorized single-family mortgage loans purchased or guaranteed as prime or subprime, we recognize that since the
U.S. mortgage market has experienced declining home prices and home sales for an extended period, there are mortgage
loans with higher LTV ratios that have a higher risk of default. We are required by our charter to have credit enhancement,
such as mortgage insurance, on those loans with greater than 80% LTV ratios at the time of our purchase, to help mitigate
the risk of loss on the portion of the loan above 80% of the property’s value. We periodically estimate the current LTV ratio
of properties we guarantee based on trends in home sale prices. As the estimated current LTV ratios increase, the borrower’s
equity in the home decreases. Borrowers with estimated current LTV ratios greater than 80% are more likely to default than
those with lower LTV ratios and those with current LTV ratios greater than 100% have negative equity and are much more
likely to default than other borrowers (regardless of financial condition). In addition, a borrower’s credit score is a useful
measure for assessing the credit quality of the borrower. Statistically, borrowers with higher credit scores are more likely to
repay or have the ability to refinance than those with lower scores. The industry has viewed those borrowers with credit
scores below 620 based on the FICO scale as having a higher risk of default. Presented below is a summary of the
composition of single-family mortgage loans held by us as well as those underlying our financial guarantees with these
higher-risk characteristics.
Table 18.2 — Higher-Risk Single-Family Mortgage Loans
2008 2007
% of Single-Family
Mortgage Portfolio
(1)
As of December 31,
Interest-only loans ......................................................................... 9% 9%
Option ARM loans ......................................................................... 1% 1%
Alt-A loans .............................................................................. 10% 11%
Estimated current LTV greater than 100%
(2)
loans .................................................... 13% 3%
Lower FICO scores (less than 620) . . ............................................................ 4% 4%
(1) Based on unpaid principal balance of the single-family loans held by us and underlying our financial guarantees.
(2) Based on our first lien exposure on the property and excludes loans purchased during each respective year. Includes the credit-enhanced portion of the
loan and excludes any secondary financing by third parties.
During 2008, an increasing percentage of our charge-offs and REO acquisition activity was associated with these higher-
risk characteristic loans. The percentages in the table above are not exclusive. In other words, loans that are included in the
interest-only loan percentage may also be included in the Alt-A characteristic loan percentage. Loans with a combination of
these attributes will have an even higher risk of default than those with isolated characteristics.
Mortgage Lenders, or Seller/Servicers
A significant portion of our single-family mortgage purchase volume is generated from several key mortgage lenders
with whom we have entered into mortgage purchase volume commitments that provide for a specified dollar amount or
minimum level of mortgage volume that these customers will deliver to us. We are exposed to institutional credit risk arising
from the insolvency or non-performance by our seller/servicers, including non-performance of their repurchase obligations
arising from the representations and warranties made to us for loans that they underwrote and sold to us. Our seller/servicers
also have a significant role in servicing single-family loans in our mortgage-related investments portfolio and those
underlying our PCs, which includes having an active role in our loss mitigation efforts. During the twelve months ended
December 31, 2008, three mortgage lenders, Bank of America, N.A. (including Countrywide Home Loans, Inc. which it
purchased on July 1, 2008), Wells Fargo Bank, N.A. (including Wachovia Corporation, the parent of our customers Wachovia
Bank, N.A. and Wachovia Mortgage, FSB which Wells Fargo purchased in September 2008) and JPMorgan Chase (including
the parent of our customers Chase Home Finance LLC and Washington Mutual Bank, which was acquired by JPMorgan
Chase in September 2008), each accounted for 10% or more of our mortgage purchase volume, and collectively accounted
for approximately 59% of our total single-family mortgage purchase volume. These top lenders are among the largest
mortgage loan originators in the U.S. in the single-family market. We are exposed to the risk that we could lose purchase
volume to the extent these arrangements are terminated without replacement from other lenders. We also have exposure to
seller/servicers to the extent we fail to realize the anticipated benefits of our loss mitigation plans, or experience a lower
realized rate of seller/servicer repurchases. Either of these conditions could lead to default rates that exceed our current
estimates and could cause our losses to be significantly higher than those estimated within our loan loss reserves.
Due to the current challenging market conditions, the financial condition and performance of many of our seller/
servicers has deteriorated. Many of these seller/servicers have failed, been acquired, received assistance from the U.S.
government, received multiple ratings downgrades or experienced liquidity constraints. In September 2008, Washington
Mutual Bank, which accounted for 6% and 7% of our single-family mortgage purchase volume during the years ended
December 31, 2008 and 2007, respectively, was closed by the Office of Thrift Supervision. The Federal Deposit Insurance
Corporation, or FDIC, was named receiver and all of Washington Mutual’s deposits, assets and certain liabilities of its
banking operations were acquired by JPMorgan Chase Bank, N.A. We have agreed to JPMorgan Chase becoming the
266 Freddie Mac